Discoverability, Contribution and Indemnity’s New Best Friend

There has been a recent shift in the court’s approach to applying the discoverability principle as set out in the Limitations Act[1] to claims for contribution and indemnity.

While earlier cases applied a strict two-year limitation window to Defendants advancing crossclaims or third-party claims seeking contribution and indemnity, recent case law has adopted a different approach. This new approach applies the discoverability principle such that the right to claim contribution and indemnity no longer expires on the two-year anniversary of when a Statement of Claim was issued, but there is a caveat, discoverability.

In this regard, recent case law has adopted the same approach as that which applies to an originating process, namely, the limitation period for claims seeking contribution and indemnity can be extended beyond two years if a Defendant could not have reasonably known of the identity or involvement of the proposed third party. Notwithstanding, there remains a presumption that the two-year limitation period for such claims starts when a Defendant is served with a Statement of Claim and this presumption will continue to apply unless a Defendant can establish to the court’s satisfaction that due diligence was exercised in attempting to identify any other alleged wrongdoers.

Limitations Act

In understanding this issue, it is helpful to review the wording of the Limitations Act.

Section 4 provides a two-year limitation period that ends on the second anniversary of when a claim was “discovered”. Therefore, the two-year limitation period does not necessarily begin on the date of loss or date that triggered the cause of action. Rather, the limitation period begins on the day the claim was “discovered”.

With respect, section 5 (1) states that the two-year window commences on the earlier of the two dates: when the person making the claim knew of its basis or when a “reasonable person” ought to have known of its basis.

Despite the “discoverability” principle set out in Section 5(1), Section 18 states that the two-year limitation period to commence claims for contribution and indemnity begins on the date the Defendant was served with the Statement of Claim.

Case law synopsis

One of the leading authorities in applying a strict interpretation of Section 18 of the Limitations Act was Justice Perell’s decision in Miaskowski v. Persaud[2]. In Miaskowski, Perell J. held, in obiter, that the deeming provision in Section 18 constituted an absolute two-year limitation period that was not subject to discoverability. Justice Perell found that this approach brought certainty and efficiency to the law of limitations and was consistent with the policy purposes of the Act.[3] Justice Perell also noted that it would be a rare case where a Defendant would not know who to sue for contribution and indemnity; in any event, the further limitation of two years would provide “ample time” to exercise due diligence to determine against whom to claim.[4]

By contrast, in Demide v. Canada (Attorney General)[5], Leach J. held, in obiter, that by its wording, Section 18 of the Limitations Act was not intended to operate as a stand-alone limitation period, but rather was subject to discoverability under Section 5.

Recent decisions and shift in approach

Until very recently, most cases seemed to adopt the approach set out by Justice Perell in Miaskowski.[6] However, two recent cases have broken from this trend. The first was Justice Monahan’s decision in Hart v. Murphy[7]. Hart involved a claim arising from a leak in an underground oil tank that although was discovered in 2009, claims for contribution and indemnity were not initiated until 2015.

In coming to his decision, Justice Monahan disagreed with Miaskowski and held that the principle of discoverability applied to claims for contribution and indemnity. With respect, Monahan J. noted that “an alleged wrongdoer, who seeks to commence a third-party claim more than two years after they have been served with a Statement of Claim, is entitled to rely on the fact that they only discovered their claim less than two years previously.”[8] Despite the application of the discoverability principle, Justice Monahan noted that the Defendants had not exercised reasonable diligence and therefore could not rely on discoverability.[9]

The second case that applied the discoverability principle was the Court of Appeal’s decision in Mega International Commercial Bank (Canada) v. Yung[10] which found that Section 18 of the Limitations Act did not displace the discoverability principles found in Section. 5. While the Court of Appeal affirmed the presumption that the two-year limitation period for claims seeking contribution and indemnity begins with the service of a Statement of Claim, the Court held that this presumption can be rebutted if the contribution claim could not have been reasonably discovered with due diligence until some later date after the Statement of Claim was served. [11]

Implications of the recent case law

While the court has provided Defendants with some relief regarding the limitation period that applies to claims seeking contribution and indemnity, Defendants must be cognizant that an extension of the two-year limitation limit period requires a Defendant to act reasonably in investigating potential claims. This was the essence of the Hart decision as Monahan J., recognized that while not all claims are discoverable within the two-year limitation period, unless a Defendant can establish that due diligence was exercised, the court will apply the default limitation period as set out in Section 18 for claims seeking contribution and indemnity and will not be extended. Accordingly and in consideration of Justice Perell’s comments that it would be a rare case where a Defendant would not know of a potential claim for contribution and indemnity, Defendants who seek to extend the two-year limitation period will face a high onus.

Takeaways

The practical implications of the recent case law are that Defendants must continue to be vigilant in identifying and investigating claims for contribution and identity even after being served with a Statement of Claim.

The recent case law has opened up a small window for Defendants to rely upon the principle of discoverability to extend the limitation period for such claims.

Defendants must now consider the potential consequences of commencing a Third Party Claim beyond two years from the date they were served with the Statement of Claim.

The Court of Appeal has now given the green light to such claims under appropriate circumstances.

But for the clearest of cases, Defendants who issue Third Party Claims beyond two years should anticipate being faced with summary judgement motions and related costs expenses.

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